The Fifth Circuit Court of Appeals has concluded that the owner of a vessel, which had contracted ownership of the vessel to a shipping company, was a non-signatory to the narrowly-drawn arbitration agreement between the shipping company and the charterer. As such, the ship owner was not required to arbitrate a shipping dispute regarding damaged cargo in New York.

In The Rice Company (Suisse), S.A. v. Precious Flowers Ltd., No. 07-20063, 2008 WL 861096 (5th Cir. Apr. 02, 2008), The Rice Company had purchased rice to be sent to Togo on a vessel owned by Precious Flowers, and chartered by IBN. After an alleged problem with the vessel caused damage to the rice, The Rice Company sued in Texas district court and also moved to compel arbitration in New York.

The court denied the motion to compel arbitration and did not decide the liability issues. The Rice Company appealed.

This Court first determined that the contract for shipment of the rice, which contained the New York arbitration agreement, was only between The Rice Company and IBN, not Precious Flowers. The parties had struck out the term "owners" and replaced it with IBN.

Next, the Court rejected The Rice Company's argument that because Precious Flowers had granted IBN the power to sign bills of lading on its behalf, Precious Flowers was bound to arbitrate in New York. There was no evidence that IBN would have signed the bill of lading as an agent of Precious Flower.

First, the Court found the New York arbitration agreement to be narrow in scope, rejecting The Rice Company's claim that a distinction between broad and narrow arbitration agreements is "an outdated analysis."

Second, even if the arbitration agreement were construed as broad, it applied only to disputes between owners and charterers. As already determined, IBN was the owner as it applied to the contract for shipment.

Precious Flowers was thus a non-signatory to the arbitration agreement. The Court also rejected The Rice Company's claims that Precious Flowers was bound as a non-signatory under the theory of agency.

IBN was only allowed to sign bills of lading "without prejudice" to Precious Flowers. Precious Flowers had "expressly rejected a New York arbitration [agreement]" in its separate contract with IBN, instead selecting a broad London arbitration agreement.

Accordingly, the Court concluded that the district court did not err in holding that Precious Flowers was not bound to arbitrate with The Rice Company.